Oil edges up as US-Iran tensions keep supply risks in focus

Oil prices inched up on Thursday as investors gauged whether U.S.-Iran talks could avert a military conflict that risks supply disruptions, though gains were capped by a build in U.S. crude inventories, Reuters reported.

Brent futures were trading at $71.04 per barrel, up 19 cents, or 0.3%, at 0415 GMT. WTI futures rose 15 cents, or 0.2%, to $65.57 per barrel.

While Brent and WTI settled largely unchanged on Wednesday, Brent on Monday rose to its highest since July 31 as Washington positioned military forces in the Middle East to press Iran to negotiate an end to its nuclear and ballistic missile programme.

"Investors are focusing on whether military conflict will be averted in the U.S.-Iran negotiations," said Toshitaka Tazawa, an analyst at Fujitomi Securities.

Even if hostilities were to break out, provided the targets were limited and the conflict short-lived, WTI would likely rise temporarily to above $70 a barrel before retreating to the $60–$65 range, he said.

An extended conflict could disrupt supplies from Iran, the third-biggest crude producer in the Organization of the Petroleum Exporting Countries, and other Middle East exporters.

U.S. envoy Steve Witkoff and Jared Kushner are due to meet an Iranian delegation for a third round of talks on Thursday in Geneva.

"The outcome of U.S.-Iran nuclear talks today will be key to the direction of oil prices ... A constructive resolution would likely prompt the market to gradually unwind as much as a $10 per barrel risk premium, which we believe is currently priced in," ING analysts said in a note on Thursday.

U.S. envoy Steve Witkoff and Jared Kushner are due to meet an Iranian delegation for a third round of talks on Thursday in Geneva.

"The outcome of U.S.-Iran nuclear talks today will be key to the direction of oil prices ... A constructive resolution would likely prompt the market to gradually unwind as much as a $10 per barrel risk premium, which we believe is currently priced in," ING analysts said in a note on Thursday.

Iranian Foreign Minister Abbas Araqchi said on Tuesday that a deal with the U.S. was "within reach, but only if diplomacy is given priority".

Saudi Arabia is increasing its oil production and exports as part of a contingency plan in case any U.S. strike on Iran disrupts supplies from the Middle East, two sources familiar with the plan said on Wednesday.

OPEC+, which includes members of the Organization of the Petroleum Exporting Countries and allies including Russia, is likely to consider raising its oil output by 137,000 barrels per day for April, three sources with knowledge of OPEC+ thinking said as the group prepares for peak summer demand and a price boost from the tensions between the U.S. and OPEC member Iran.